CHAPTER ELEVEN

Limited Liability Companies and Social Purpose Corporations

Having determined that conventional corporations, whether located in states with constituency statutes or not, are not viable alternatives for imposing stakeholder governance, we can ask one final question. Are there any other alternatives? The answer is yes, and this chapter discusses the use of limited liability companies, benefit LLCs, and social purpose corporations to do so.

Ordinary Limited Liability Companies

Benefit corporations are increasingly popular structures for entrepreneurs looking to achieve both profit and social benefit, but similar goals can be accomplished with a limited liability company. For ease of reference, this chapter will focus on Delaware LLC law, as the statutory provisions permitting fiduciary modification differ among U.S. jurisdictions. LLCs may present an attractive alternative for entrepreneurs who want to incorporate a social purpose into their companies. Forming as an LLC can bring many benefits, including pass-through taxation and a flexible management structure.

The founder of an LLC may contract around default fiduciary duties to create a company with managers who have the same obligations as the directors of a benefit corporation. Delaware cases have addressed the issue of default fiduciary duties in the LLC context,¹ and recent amendments to Delaware’s Limited Liability Company Act clarified that managers of LLCs have default fiduciary duties.² Nevertheless, the managers’ duties may be “expanded or restricted or eliminated by provisions in the limited liability company agreement.”³ LLC founders are free to choose the terms of the agreement because courts will enforce explicit contractual provisions, even if they may appear onerous or one-sided.⁴

The LLC Act imposes one limit on private ordering when it states that an LLC agreement “may not eliminate the implied contractual covenant of good faith and fair dealing.”⁵ The implied covenant of good faith and fair dealing has been described in two potentially conflicting ways. First, courts have explained it as a limited “gap filler” requiring the court to arrive at an answer for a situation not explicitly accounted for in the contract.⁶ According to this view, “one generally cannot base a claim for breach of the implied covenant on conduct authorized by the agreement.”⁷ Second, courts have identified the implied covenant as a broader method for a court to “refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving” the benefit of the bargain.⁸

Despite this limit, the LLC structure is sufficiently flexible to create a benefit corporation–like arrangement through private ordering. In fact, many LLCs (e.g., Urban Green Development LLC, Blue Earth Consultants LLC, and Good Capital LLC) are already certified as B Corps by B Lab, a nonprofit entity that certifies socially conscious business entities and that requires a legal structure that creates broad accountability.⁹ B Lab requires certain language in the operating agreement to ensure that the LLC’s mission is aligned with its stakeholders. That language is reproduced in appendix G.

There also are significant drawbacks to using an LLC structure. First, many investors strongly favor investing in a corporation rather than an LLC. While there is a well-developed body of case law for corporations, LLC case law is much less developed. Additionally, LLC operating agreements are more varied than their corporate counterparts (charters and bylaws), which are relatively “standard-form.” For these reasons, many investors avoid investing in LLCs.¹⁰ If founders anticipate raising capital, they should be wary of forming an LLC. Second, writing benefit corporation provisions into an LLC agreement does not allow companies to differentiate themselves from the competition with a recognizable entity form. In a marketplace where “greenwashing” is common, a legal change of structure from LLC to public benefit corporation can signal the company’s commitment to its core values.¹¹

Several states have adopted specific provisions for the “low-profit limited liability company.” This form was adopted for social enterprises that want to encourage investments from foundations that are allowed to invest in “program-related investments.” For a number of reasons, low-profit limited liability companies have not been a particularly successful experiment.¹² Although the form can be used for entities that intend to be governed by stakeholder values, there are probably few advantages to using them in the place of standard LLCs.

Benefit Limited Liability Companies

In addition, despite the flexibility inherent in LLC law, three states have moved to authorize a “Benefit LLC.”¹³ Such a provision locks in LLC managers’ broad obligations to all stakeholders, along with broad purpose and transparency requirements. Although such a provision might not be necessary, it addresses some of the problems mentioned in the previous section. It provides a measure of uniformity, so that investors, workers, customers, and other interested stakeholders can recognize the benefit “brand.” It also saves cash-strapped start-ups from the need to have legal counsel draft bespoke provisions. Finally, because the purpose, accountability, and transparency elements are mandatory, the provisions help to avoid the greenwashing concern.

Social Purpose Corporations

Concurrent with the movement to adopt benefit corporation statutes, a number of states have adopted a form known generally as the social purpose corporation, although the name varies from state to state.¹⁴ These statutes permit a departure from shareholder primacy by allowing corporations to select one or more stakeholder interests that directors are required to consider. Unlike benefit corporations, however, they are not required to consider their general effect on society and the environment. As a result, they do not mandate the broad stakeholder governance envisioned by the benefit corporation statutes.

However, corporations that are formed under social purpose corporation provisions can choose a general public benefit and, in doing so, attain benefit corporation–like governance. B Lab has prepared language that social purpose corporations can use in their charters to adopt such a structure.¹⁵

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Table 8 lists which forms of stakeholder governance exist in each of the fifty U.S. states and the District of Columbia.

TABLE 8: STAKEHOLDER GOVERNANCE STATE-BY-STATE